Industrial Fall UpdateWritten By: ELI LUSTGARTEN
Article Date: 11-01-2007
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
Conditions are still indicative of a two-tier recovery.
Recent U.S. economy data (as of early October) continues to show weakness and has brought into question the recovery in both the domestic economy and in several key end markets. This has created significant volatility in the stock market, which has been muted and reversed in recent weeks by the Fed 50 basis point interest rate cut and anticipation of further cuts. Further, the longer-term fixed income and commodity markets have been less sanguine, probably related to fears of a potential Fed-induced new round of inflation. This is particularly true with oil hovering at or above $80 barrel, gold and other commodities soaring toward or at new highs, and a dollar falling toward record lows against major currencies.
In our view, the domestic economy has managed to show growth, but is probably not in position to generate substantial inflationary pressures over the near-term. GDP growth has only managed to grow about 1.9 percent in the 12 months ending June 2007 with 2Q07 now a revised 3.8 percent compared to 0.6 percent in 1Q07. The consensus forecasts for GDP growth in H2:2007 are being trimmed back daily and likely will remain well below the near 3 percent generally accepted limit of noninflationary growth for the domestic economy under the pressures of the housing slump, tighter credit and stress on consumer demand.
We still believe we are headed toward a two-tier economic recovery with most industrial markets being a key bright spot of the economy driven by ongoing robust global demand offsetting sluggish domestic markets. There may not be much hope in 2007 and perhaps even first half of 2008 for auto, trucks, housing and construction/material handling equipment with the key question being whether we've seen the worst levels of activity in each sector or is their another step down.
The short-lived UAW strike has created greater certainty around retiree health care costs, but also underscores the volatility in automotive-related markets. It remains to be seen how the short strike impacts sentiment across industrial markets though Q4 auto production is likely to show negative comparisons with a weak Q4:06. The bears on auto production for 2007 are likely correct with NAFTA production probably about 14.7 to 14.9 million, compared to about 15.25 million last year and near 15.8 million in the prior two years. We still look for modest production improvement in 2008 to about 15 million units on the strength of increased NA transplant capacity.
U.S. trucks moved less freight in August 2007 than in July though tonnage was up year over year for the first time since March due to an easy comparison (weak August 2006). Year to date tonnage is down 2.2 percent. The American Truck Association (ATA) has projected lackluster freight movement for the remainder of 2007, and does not expect that truck freight "will consistently grow at its historical average growth over the last 10 years of 2.5 percent until the second half of 2008." This is consistent with our belief that the recovery of demand in the truck sector has been pushed out into 2008.
Housing continues to weigh on the stock market. Residential fixed investment, the GDP component that includes spending on housing, fell by a revised 11.8 percent in the second quarter and compares to a 16.3 percent decline in Q1:07. New-home sales resumed falling in August, sinking to the lowest level in seven years, prices tumbled, and unsold homes remain at record levels of about 10 months at current selling rates. The housing sector will remain a drag on the U.S. economy likely well into next year.
Overall, construction spending in August 2007 was $1,166.7 billion, up 0.2 percent from July's revised level but down 1.7 percent from August 2006. There is a spillover affect from the sub-prime financial
crisis into nonresidential construction that is likely to occur, reducing spending growth in the nonresidential sector to fall to 0 to 5 percent in 2008 from what is likely to be 10 to 12 percent in 2007.
Our forecast for construction equipment demand is still down 10 to 15 percent or more in 2007 and an additional 2 to 5 percent decline next year, though production may be closer to flat to up modestly because of the significant inventory reduction underway this year. We still expect material handling types of equipment (AWPs, lift trucks, cranes) to see softening demand over the next 12 months and perhaps double-digit negative comparisons for 2008.
The bottom line hasn't changed for now, but greater uncertainty has been seen in the market in recent weeks. Although 2007 has been a much more challenging year the worst is hopefully almost over. Better growth is still likely ahead for Q4 2007 and 2008 though quarterly patterns may be volatile. Risk remains in the market if an anticipated second Fed interest rate cut does not materialize in Q4.
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